Lindsay Clayborne, Head of Human Resources at Cardata, offers expert insights into the 2024 mileage rate changes and how organizations can adapt their reimbursement policies.
Implications of the Updated Mileage Rate on Employee Reimbursement
Lindsay shares, “Firstly, the great news is that the mileage rate changing doesn’t mean your reimbursement policy has to change. That’s a decision you get to make as a company!” Despite the increase from 65.5¢ to 67¢ per mile, it’s crucial to remember that this is simply the new maximum tax-free threshold for reimbursements. Companies that currently offer a lower rate don’t necessarily have to raise it to align with the new IRS ceiling.
“Some public offices, like universities and government services, follow the IRS rate precisely,” she notes, but companies aren’t obligated to do the same. Organizations can maintain their current rates or increase them, so long as they don’t exceed the new 67¢ threshold, enabling employees to take more home tax-free.
If the rate decreases in 2025, as it has in the past, “you would need to communicate to your employees that, if their current reimbursement rate was at the previous year’s maximum, it will either be kept the same but subject to tax, or lowered but kept tax-free.” Clayborne emphasizes the importance of explaining that reduced vehicle costs influence IRS rates.
She also highlights state-specific considerations: “If you live in one of the three states, you must reimburse employees for the full expense of driving for work: Illinois, Massachusetts, and California.” This doesn’t mean paying the exact IRS rate, but organizations must account for their reimbursement amounts.
Clayborne recommends two ways to ensure coverage of employee driving expenses: either pay the IRS rate or use your own calculations, such as the Fixed and Variable Rate (FAVR) method. “One cool thing about FAVR is that it actually lets you reimburse over the IRS rate tax-free to cover car costs in especially pricey areas, like California,” she points out.
Anticipating the Impact on Budget Planning
“Companies should account for 2024 mileage rate adjustments as they affect a variety of different mileage reimbursement programs; even a small increase of 1.5 cents can have outsized impacts on company budgets,” Lindsay notes. Vehicle programs can be significant expenses, costing millions of dollars and requiring careful management.
Although the mileage rate increased to 67¢ per mile for 2024, this tax-free ceiling is optional. “Unless you live in California, Massachusetts, or Illinois, your budget for travel dollars does not necessarily have to increase this year,” she advises.
For those looking to enhance their vehicle reimbursement program, the rate increase allows companies to “give every employee 1.5¢ more tax-free.” This can increase costs, but as Lindsay optimistically points out, “If you’re thriving, employees can share in the good fortune.”
Moreover, the updated rate affects the taxability threshold for 463 accountable allowances. “Now that the IRS rate is 67¢, 463 accountable allowances can pay more per mile tax-free, too,” she adds.
Lastly, for companies with a FAVR program, the IRS maximum rate has less impact. “On FAVR, you can pay over the IRS rate tax-free because you’ve done the upfront work to calculate regional car costs.” However, non-compliance with the FAVR program means that allowances will be tested against the IRS rate for tax liability.
In summary, rising vehicle costs have driven up the IRS rate, offering companies more tax-free space for employee reimbursement. While budgets may see increases, organizations can strategically navigate these changes to optimize their reimbursement policies.
Connect with Lindsay Clayborne on LinkedIn to gain deeper insights into vehicle reimbursement programs and how to manage your company’s HR policies effectively.
